My journey to financial independence and early retirement

We paid off our mortgage!

Well! We finally did it! We decided to pay off our house early. What an amazing feeling it is to know that a bank will never foreclose on our home. Paying off the house was not an easy decision. A lot of factors played into if and when we were going to pay it off. Overall, I’m very happy with the decision. It’s been 1 month since we paid it off and not writing a check to a mortgage company this month was a satisfying feeling! I’m going to talk about what made us come to the decision, how we achieved such success and what it means for our family.

Why did we pay off the mortgage for our house?

In an effort to alleviate the stresses of this world, it is in my best interest to eliminate as much debt as possible (lighthouse 2).

From a psychological perspective, I sleep much better at night knowing that we own everything in our possession. What that means is that if the stock markets collapses or I lose my job, I don’t have to worry about the financial situation of our house because it is paid for.

From a financial perspective, this is very simple and makes cents (get it?). The math may take a second to digest, but it is simple. The average price for a home in the area of Waco that we live in, is about $220,000. I’ll use an average price for a house, as an example, to demonstrate the implications of taking a mortgage on a house. Let’s assume the mortgage terms are :

The loan amount is $200,000

The term of the loan is 30 year fixed rate

Interest rate is 3.5%

Compound interest working against you

Using a simple mortgage calculator, the total cost of the mortgage will be roughly $320,000. That’s about $120,000 worth of interest over the 30-year period. But you’re thinking, don’t worry about it, I’ll be out of the house in 5 – 7 years. But you see, there’s a HUGE problem with buying / moving to a house every 5-7 years. The financial elephant in the room is that home buyers don’t think about amortization.

Amortization

What is amortization? When you buy a house and take out a loan for 30 years, the loan is amortized over the 30-year time frame. What that means is that at the beginning of each month when you make a payment on your loan, your re-payment plan is defined by the amortization schedule. (See table below). The majority of your payment (principal + interest) is interest.

Each month, your monthly payment stays the same, but in the beginning of your loan, roughly half of your payment goes straight towards interest. That makes sense because your interest is based off of the principal balance of the loan, and as you pay down the principal, the interest amount also goes down. The chart below shows the breakdown between the balance of the loan, the interest and the principal. For example, in year 1, your beginning loan balance is $200,000. After 12 months of payments, you will have an “Ending Balance” of $196,161, and so on through the life of your mortgage.

Moving on Up

Here’s the problem, though, most people move every 5 – 7 years. From looking at the table above, you’ll notice that the amount of interest paid is nearly double the amount of principal paid. In fact, after 7 years, the average American with a loan like this will pay roughly $45,000 in interest in the first 7 years of owning a home. It isn’t until year 10 that your principal payment becomes more than your interest payment. If people lived in their homes for 30 years, then this seems like a fair trade off, but if you look at the math, you’ll realize that as people keep moving to different houses and taking out fresh loans, the cycle starts all over again.

I am not against using mortgages as a tool. I just want to show you the math behind the power of compounding interest working against you (in the form of a mortgage). So, from a financial perspective, we had the money to pay off the house, and we did! Instead of paying a bank, with interest, every month, we now gladly put that into our investment accounts.

How did we pay off the mortgage for our house?

In late 2011, I purchased a rental home for my parents in the Houston area. I was working overseas at the time and my parents were renting an apartment not far from where we grew up. So I decided to buy a house for my parents so they could have more room when our family (of 8 back then) got together. House hunting we went! Our budget was $85,000 because even back then I was very debt-averse. We found a foreclosure for $95,000 and offered $85,000 and the bank accepted. The house wasn’t in terrible shape, and after a lot of cleaning, paint and some minor updates, my parents made that house their home.

Over the course of 2 years (between 2014 and 2015), I lost both my parents. I was extremely heartbroken and knew I could not keep the house, there was so much pain there. They had made their home there over the past few years, and I was so sad when we cleared out the house and put it on the market. It was a bitter sweet moment when I met with the real estate agent. I was honored to bless my parents the last few years of their lives, but I know the home served them well and they made it their own.

Unbeknownst to me, the price of housing had risen significantly in that area of Houston. When the realtor came to the house, he suggested listing it at $139,900. After renovations and closing fees, we were able to use that money along with alot of our savings to pay off our current home. Paying off our house was a tough decision. I was unsure if I should invest the money into the stock market and hope to reap a profitable return, or pay off the house. We prayed about it and decided to pay off the house. While the stock market can be unpredictable in the short term (while profitable in the long term), it was more important for us to be debt-free first, and then have money working for us.

I never thought I would have been able to live in a paid for house, but our freedom story is a testament to my parents. My father taught me everything I know about money and business, and my mother taught me everything I know about contentment and happiness. Thank you mom and dad.

What being mortgage free means to our family?

In a word, freedom. Like a gazelle that runs away from the clutches of the cheetah, we have freedom to live the way we want. We are free from debt-oppression. More importantly, though, we have options. Every month, our $1000 principal and interest payment now goes to achieving our financial independence goals. We have the option of using that money towards things that are importance to us. That money has now become a tool in our hands to use, at-will, to get closer to financial independence.

Now that we are mortgage free, we have an extra $1000 a month working for us. One option for that extra $1000 a month could be to take advantage of stock market dips. Another option is to use that $1000 to pay cash for a vacation! Another option is to put that money towards another car, or home improvements or towards investments..the options are endless! And that’s what being mortgage free means to our family, endless opportunities.

What would it look like if you paid off your house? What would it mean for you or your family? Would your outlook on life change at all?